RSI Indicator - Relative Strength Index

Relative Strength Index (RSI) is a popular momentum oscillator developed by
J. Welles Wilder Jr. and detailed in his book New Concepts in Technical
Trading Systems.

The Relative Strength Index compares upward movements in closing price to
downward movements over a selected period. Wilder originally used a 14 day
period, but 7 and 9 days are commonly used to trade the short cycle and 21 or
25 days for the intermediate cycle. Please note that Wilder does not use the
standard moving average formula and the time
period may need adjustment.

RSI is smoother than the Momentum or Rate of Change
oscillators and is not as susceptible to distortion from unusually high or low
prices at the start of the window (detailed in Momentum).
It is also formulated to fluctuate between 0 and 100, enabling fixed Overbought
and Oversold levels.

Go long, in an up-trend, when RSI falls below 40 and rises back above it.

Go short, in a down-trend, when RSI rises above 60 and falls back below it.

Exit using a trend indicator.

Take profits on divergences.
Unless confirmed by a trend indicator, Relative Strength Index divergences are
not strong enough signals to trade in a trending market.

Example

Wal-Mart Stores Inc. is plotted with a
21
day exponential moving average (MA) and
9 day Relative Strength Index (RSI). A 2-day closing filter
is used with the MA.

Mouse over chart captions to display trading signals.

Price is trending downwards (staying below the
moving average). Do not take long signals until the
MA turns upward, otherwise we are trading
against the trend.

A bullish divergence on
Relative Strength Index is reinforced by completion of a
failure swing at [2].
Go long [L] when the MA slopes upwards
and RSI crosses to above 40.

RSI completes a minor failure swing at [3]. Take profits [P] and exit the
remaining position [X] when there are two closes below the
MA.
Do not go short as price is trending upwards (staying above the
moving average).

Price has started to fluctuate around the
moving average, signaling a ranging market. Go short [S] when RSI
crosses from above to below 70.

Go long [L] when RSI crosses from below to above 30.

There has been a breakout from the trading range and price is trending
upwards. Do not close the long position.

Take profits [P] on the bearish divergence (Price has completed a higher
peak while RSI has experienced a lower peak).

Take profits [P]. A bearish
triple divergence is confirmed by completion of a large failure swing at [8].

Increase your long position [L]. RSI has crossed from below to above 40
during an up-trend.
Exit your position [X] when there are two closes below the
MA. Do not go short as the
still slopes upwards.

A small bearish divergence warns of a possible trend reversal.

A bearish triple
divergence is reinforced by completion of a
failure swing at [11].
Wait until the MA has turned down and
RSI has crossed to below 60 before entering a short trade [S].

We recommend that users try shorter time periods when using one of the above
indicators. For example, if you are tracking a 30-day cycle you would normally
select a 15-day Indicator Time Period.
With the RSI, adjust the time period as follows: